Cryptocurrency staking is a trend that has emerged to address the growing energy demand from Proof of Work (PoW) protocols. This is the type of protocol used by the Bitcoin blockchain to authenticate transactions.

staking

In essence, cryptocurrency staking involves buying back and setting aside a certain number of tokens to use to validate transactions made through the blockchain. This innovative protocol, called Proof of Stake (PoS), is less energy-intensive as it eliminates or at least reduces the need to use multiple mining devices to secure the blockchain.

PoW PoS
Miner solves complex math puzzles. Participants support the network by locking funds into it.
The first miner to solve a math puzzle adds blocks to the blockchain. Participants create blocks by staking coins into the blockchain.
Requires specialized mining hardware that consumes a lot of energy. Considered an energy efficient solution.
Miner with more computing power has more chance to solve block puzzle and get reward. Validators that stake more coins are more likely to receive rewards.

Many blockchains, including Ethereum, are now adopting PoS protocols to power the network in order to address growing environmental concerns as cryptocurrencies gain wider acceptance.

This article will explain crypto staking in more detail while also covering some of the best staking opportunities.

What is Cryptocurrency Staking?

Cryptocurrency staking is the process that involves buying and spending a certain amount of tokens to become an active validator node for the network. By simply holding these coins, the buyer becomes an important part of the network’s secure infrastructure and is compensated accordingly.

Staking income is provided in the form of interest paid to holders. Interest rates between networks will not be the same, depending on a number of factors such as supply and demand dynamics.

As the number of networks using PoS protocol continues to grow, there are many new alternatives to staking cryptocurrencies such as the introduction of pool staking, also known as staking pool, staking provider and cold staking.

These initiatives aim to democratize access to opportunities in the staking space for retail investors who hold small amounts of tokens of a given blockchain.

What is Proof of Stake?

Proof of Stake is a newer consensus mechanism, with the idea of ​​increasing speed and efficiency while reducing fees. One major way PoS reduces fees is by not requiring all miners to solve math problems, which is a very energy-intensive process. Instead, transactions are validated by real people investing in the blockchain through staking.

Staking has a similar function to mining. It is the process by which network participants are selected to add the latest batch of transactions to the blockchain and earn some cryptocurrency.
The implementation process of the projects will not be the same, but in essence, users place their tokens in a row for a chance to add a new block to the blockchain and exchange it for a reward. The staked tokens act as a guarantee of the validity of any new transactions they add to the blockchain.

The network chooses validators based on their stake size and how long they have held. Therefore, the participants who invest the most will have a high probability of being rewarded. If transactions in a new block are found to be invalid, users may have a certain amount of their stake burned by the network. This is called a slashing event.

Staking action how?

The staking process begins by purchasing a certain number of tokens in the network. It is important to note that staking can only be done in a network that supports the PoS protocol. After completing the purchase, the user must lock the holdings by following the process indicated by the developer of each particular network. In most cases, a staking transaction can be done in minutes by following the instructions on your wallet.

On the other hand, exchanges also facilitate the token staking process by introducing features like staking pools. These aim to increase the reward obtained from staking tokens of a certain network by increasing the number of coins staked at a time.

In most cases, the higher the number of coins staked, the more transactions a given node will be assigned to validate. For the most part, nodes are ranked based on the number of tokens they hold.

Therefore, the nodes holding the largest number of tokens will usually receive a higher offset. That is why staking pools are becoming more and more popular.

On the other hand, users can stake tokens for a certain period of time – known as fixed staking. Additionally, some providers also create a more flexible program in which users can withdraw their tokens at any given point – known as flexible staking.

The rigid nature of fixed staking offers higher interest rates to holders, while flexible staking tends to offer less attractive payouts.

Benefits and risks of crypto staking

Recently, staking has become popular due to the attractive rewards that cryptocurrency holders receive from this activity. Currently, staking interest rates can range from 6% per annum on reputable networks like Ethereum and Cardano to 100% on smaller networks, like PancakeSwap and Kava.

To summarize, staking has the following 4 benefits:

– Generate passive income.

– Save more energy than mining form.

– Low entry fee.

– High security.a trading account in less than 3 min

However, high returns from staking are not without risk as many factors can affect the performance and security of staked tokens.

The first risk to mention is the possibility of a cybersecurity incident that could result in the loss of your tokens held in a certain exchange or online wallet. To eliminate this threat, some investors have resorted to cold staking – the practice of storing tokens on hardware such as hard drives.

Cold storage will protect your assets from network attacks, since the hardware will not be connected to the internet. However, hardware loss or damage is still a risk when using this form of staking.

Another risk of staking is that cryptocurrency prices are likely to plummet during the staking period. Since staking works by locking up coins, you won’t be able to liquidate your holdings in the event of a sideways market and thus you risk losing some of your capital without being able to cut your losses by selling coins.

Finally, there is a risk associated with the uptime of the validator node holding your staked tokens. In most cases, the network will penalize validators if their ability to process transactions is not guaranteed, meaning that staking earnings are reduced due to any disruption in the uptime of the process. accuracy.

OLDevil Best staking coin of 2021

The process of choosing the best coins to stake should not be entirely focused on the rewards provided by the network. Besides that, there are other factors that need to be considered, including lock time and token liquidity.

From a reward perspective, low-cap tokens tend to offer higher rewards than more reputable protocols like Ethereum to attract more demand. However, you may have difficulty selling your earned tokens if the coin is very illiquid – meaning low daily trading volume.

On the other hand, prolonged account lockout periods can expose you to market risk, which means you could lose a sizable portion of your capital by not being able to sell coins during a downturn to cut your losses.

Considering the low interest environment, earning an annual percentage return of 6% to 20% on assets is attractive enough and several reputable networks like Ethereum, Polkadot, and Cardano are currently offering various types of rewards. there.

Meanwhile, other tokens like Algorand, Polygon, Kusama, and Solana offer even higher interest rates. As a result, the profits are more attractive and their trading volume is high enough to allow you to trade the rewards without any hassle.

Conclude

Staking has become an attractive resource for investors looking to earn income from their crypto holdings – similar to how high-dividend bonds or stocks work.

The attractive annual interest rates of some tokens today have brought billions of dollars into the business, and the PoS protocol also helps some networks to allay environmental concerns due to their energy-intensive nature of the traditional PoW protocol.

However, like any other form of investment, staking comes with risks such as losing coins in an online wallet if there is a cyber attack or losing capital due to a sharp drop in token prices during the lockup period.

Therefore, you should analyze the risk/reward ratio of staking based on market conditions, network reliability, and blockchain-provided rewards for staking coins to ensure that you are adequately compensated for your staking. the risk you are taking.

Minh Anh

According to Capital

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